Major Companies Realize Futility of Stock Buybacks (MO, MMM, T, EK, T, PHG)

More and more companies are either suspending or killing their share repurchases and stock buyback plans.  Some are doing it to conserve cash in a much harder operating environment.  But many companies have figured out that shrinking their floats by a marginal amount does little to support their stocks.  We have given some detailed data below on the "no more buybacks" status of Altria Group Inc. (NYSE: MO),  3M Co. (NYSE: MMM), Eastman Kodak Company (NYSE: EK), AT&T, Inc. (NYSE: T), and Royal Philips Electronics (NYSE: PHG).

This morning, Altria Group Inc. (NYSE: MO) announced that it was suspending itsshare buyback plan after its net earnings fell.  This stock has fallen byone-third since the PMI spin-off and since it was supposed to start"The mother of all buybacks."  Maybe a dividend north of 7% is finallyenough.

Also this morning, 3M Co. (NYSE: MMM), along with its earningsdisappointment with a 37% drop in earnings and lower guidance, cutcap-ex plans by one-third and announced that it was halting its sharebuyback plan to conserve capital.  It also warned that layoffs were likely on top of the 1,000 already announced.  The stock is down about 30% from lastyear’s highs.

Eastman Kodak Company (NYSE: EK) posted a loss, warned of cost cuts andlayoffs… and still spent $82 million to repurchase 6 million sharesof common stock.  While its buyback program remains in effect throughthe end of 2009, it is not currently repurchasing any of its shares andit will review that each quarter.  With its losses and additionallayoffs, the company better be glad it halted its buybacks.  The totaljob cuts are now expected to be between 3,500 and 4,500 positionsduring 2009, or 14% to 18% of its total workforce. Here is a figure toconsider: $82 million dollars spent represents 820 jobs with acost of $100,000.00 per year.

Just yesterday, AT&T, Inc. (NYSE: T) announced after its earningsthat it had no plans for significant buybacks.  Shares are down about 40% from the start of last summer and the stock has adividend yield north of 6%.

Earlier this week, Royal Philips Electronics (NYSE: PHG) posted a lossof $1.9 billion (figure converted from euros) and announced that itwould cut 6,000 jobs.  At least it said it was suspending stock buybackactivities until further notice.  Its shares have been more than cut inhalf and its dividend yield is now about 4.5%.

This should not be interpreted as a message that all stock buybackactivity is bad.  It can be a great stabilizing tool if used properly.  It can alsooffer a great chance for a company to buy its own stock on the cheapthat can be used to make an acquisition down the road.  But….

There is a flip-side to buying back stock.  If a company is aserial-dilluter by throwing around employee stock options left andright, then the cash being used for a share buyback is essentially nodifferent than the company writing out cash bonuses.

Smart Money also ran a piece showing how some of the larger buybackshave flopped.  These companies spent vast amounts of cash, yet thearticle showed that these stocks still fell 25% to 72%.

This will also be yet another thorn in the side of activist investors who often seek buybacks to boost  a company’s share price..  As large DJIA components and other large companies opt to preserve cash rather than fork out money for short-term stability, activists will have a more difficult time arguing that repurchasing an company’s shares is a good idea.

Jon C. Ogg
January 29, 2009